19 terms

Economics

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Utility
is a measure of preferences over some set of goods and services. The concept is an important underpinning of rational choice theory in economics and game theory because it represents satisfaction experienced by the consumer of a good.

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Diminishing Utility
The concept that marginal utilities diminish across the ranges relevant to decision-making are called the "law of diminishing marginal utility" (and is also known as Gossen's First Law). This refers to the increase in utility and individual gains from increases in the consumption of a particular good.

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Supply and Demand
an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted.

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Scarcity
is the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs.

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Elasticity
the measurement of how responsive an economic variable is to a change in another. It gives answers to questions such as:
- "If I lower the price of a product, how much more will sell?"
- "If I raise the price of one good, how will that affect sales of this other good?"
- "If the market price of a product goes down, how much will that affect the amount that firms will be willing to supply to the market?"

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Economies of Scale
the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

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Opportunity Cost
the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would have been had by taking the second best available choice.

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Marginal Cost
the change in the total cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good.

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Comparative Advantage
an economic theory about the work gains from trade for individuals, firms, or nations that arise from differences in their factor endowments or technological progress. In an economic model, an agent has a comparative advantage over another in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade.

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Trade-offs
a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect. More colloquially, if one thing increases, some other thing must decrease.

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Price Discrimination
a microeconomic pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets.

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Positive and Negative Externalities
the cost or benefit that affects a party who did not choose to incur that cost or benefit. Economists often urge governments to adopt policies that "internalize" an externality, so that costs and benefits will affect mainly parties who choose to incur them.

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Sunk Costs
a cost that has already been incurred and cannot be recovered. Sunk costs (also known as retrospective costs) are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken.

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Moral Hazard
occurs when one person takes more risks because someone else bears the cost of those risks. A moral hazard may occur where the actions of one party may change to the detriment of another after a financial transaction has taken place.

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Game Theory
What economists call game theory psychologists call the theory of social situations, which is an accurate description of what game theory is about. Although game theory is relevant to parlor games such as poker or bridge, most research in game theory focuses on how groups of people interact. There are two main branches of game theory: cooperative and noncooperative game theory. Noncooperative game theory deals largely with how intelligent individuals interact with one another in an effort to achieve their own goals. This is usually what people are referring to.

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Prisoner's' Dilemma
a standard example of a game analyzed in game theory that shows why two completely "rational" individuals might not cooperate, even if it appears that it is in their best interests to do so. Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communicating with the other. The prosecutors lack sufficient evidence to convict the pair on the principal charge. They hope to get both sentenced to a year in prison on a lesser charge. Simultaneously, the prosecutor's offer each prisoner a bargain. Each prisoner is given the opportunity either to: betray the other by testifying that the other committed the crime, or to cooperate with the other by remaining silent. The offer is:
- If A and B each betray the other, each of them serves 2 years in prison
- If A betrays B but B remains silent, A will be set free and B will serve 3 years in prison (and vice versa)
- If A and B both remain silent, both of them will only serve 1 year in prison (on the lesser charge)

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Tragedy of the Commons
an economic theory of a situation within a shared resource system where individual users acting independently according to their own self-interest behave contrary to the common good of all users by depleting that resource through their collective action.

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Bottlenecks
one process in a chain of processes, such that its limited capacity reduces the capacity of the whole chain. The result of having a bottleneck are stalls in production, supply overstock, pressure from customers and low employee morale.

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Time value of Money
describes the greater benefit of receiving money now rather than later. The principle of the time value of money explains why interest is paid or earned. Interest, whether it is a bank deposit or debt, compensates the depositor or lender for the time value of money.

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